It's Different This Time: PMIs And Global Stocks

Tyler Durden's picture


The fundamental backdrop, in the shape of economic lead indicators and earnings momentum, has been deteriorating: manufacturing PMIs for the US, China, Japan, Korea, the Euro zone, and the UK are all now sub-50, and consensus earnings growth estimates for 2012 have been halved in recent months. What has this meant for Global Equities? Well, as UBS notes, in the last three months, very little. The MSCI AC World index is up more than 12% from the 4 June low. That markets have rallied while fundamentals have deteriorated in this manner is unusual. Historically, equity market rebounds have tended to coincide with a trough in PMIs and earnings momentum – that is, when PMIs have stopped going down and the pace of earnings downgrades slows (waiting for PMIs to recover to 50 or for earnings momentum to turn positive is usually too late). Markets now appear to be taking their cues from central bankers: potential policy actions are becoming a sort of ‘lead indicator of the lead indicators’, if you will. Given the recent rally, in addition to underlying macro weakness, policy action - and effective action at that – has become increasingly important for investors. Without it this recent rally could end up looking more like a false start than a head start.


UBS: PMIs and Global Equities…

We have taken a long-run series of selected manufacturing PMIs from around the world (US, Euro zone, China, Japan and Korea). The vast bulk of the early history comes from the US, with some countries’ data not starting until the 1990s or even later. We have simply weighted by current GDP weights – this will only give us an estimate, but our composite measure does seem to move closely with the US ISM over the last decades.

We have circled the nine periods that we think were major turning points in the indicator since 1973 (trying to reduce some of the noise in mid-cycle volatility).

Historically, the trough in Global Equities performance has tended to coincide with the trough in the PMIs (chart 2).


But this time round the rally has occurred ahead of the turn (chart 3).


And earnings momentum has been sharply negative (and worsening) over the last three months as markets rallied. June, July, and August all saw deteriorating momentum (Chart 6),


the result of which has been a near-halving of 2012 consensus earnings growth estimates (Chart 7).


Of course, if policymakers do follow through with drastic actions that reduce Euro zone break-up risk or drive an acceleration in US or Chinese economic growth, then PMI and earnings stabilisation will follow. If this is the case then equity markets will have gotten a nice head start in the last few months. However, given the recent rally, in addition to underlying macro weakness, policy action - and effective action at that – has become increasingly important for investors. Without it this recent rally could end up looking more like a false start than a head start.

Source: UBS

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Mon, 09/10/2012 - 15:12 | 2779409 vote_libertaria...
vote_libertarian_party's picture

Sooooooooo what you're saying is buy buy buy???


(that seems to be all the 'puters understand)

Mon, 09/10/2012 - 15:15 | 2779415 CPL
CPL's picture

Silver is toeing the line on 34 an ounce right now, there is no ceiling limit on it after that.


Mon, 09/10/2012 - 15:21 | 2779434 Pegasus Muse
Pegasus Muse's picture

Last Sat. on KWN, Dan Norcini thought $37.50 looked like the last resistence before it launches to the 40s.

Mon, 09/10/2012 - 15:31 | 2779478 CPL
CPL's picture

Not sure how he's calculating it, but physical metals don't behave like equities.  It's a true supply demand situation.  If I use tradestation and model SLV, the paper equity, Dan is correct.  If I use barter-calls and price averaging from retail/kitco/kijiji/ebay...I'm at 34.00 with the same math.  


Even then It's jumped a buck a day for nearly a week because of supply issues, go check out kitco and make sure you call a head.


Then there is horseshit from executives living on some cloud 9 somewhere like this.


Seriously...$2 a day is what miners should be paid according you some douchey cunt.  

Mon, 09/10/2012 - 15:50 | 2779537 RockyRacoon
RockyRacoon's picture

" It's a true supply demand situation."

Ha!  I just about fell outta my chair at that one.  Chortle, snort, guffaw.

Mon, 09/10/2012 - 15:43 | 2779509 debtor of last ...
debtor of last resort's picture

KWN is offline for a few hours now. Again.

Mon, 09/10/2012 - 19:26 | 2780208 Element
Element's picture

So either the global data on trade fundamentals are all wrong ... or the stock market's rise is all wrong.

Mon, 09/10/2012 - 15:17 | 2779421 Lost Wages
Lost Wages's picture

Haven't noticed, but has anyone mentioned 41,000 miners are on strike in South Africa today?

Mon, 09/10/2012 - 15:32 | 2779481 CPL
CPL's picture

And in Australia.

Mon, 09/10/2012 - 15:52 | 2779542 RockyRacoon
RockyRacoon's picture

It doesn't matter unless one of them is named Kardashian. 

Mon, 09/10/2012 - 15:17 | 2779425 e-man
e-man's picture

Who cares about PMI, the market is doing so well!  I, for one, am going to quit my job so I can spend more time looking for a house to buy!

Mon, 09/10/2012 - 15:21 | 2779442 Winston Churchill
Winston Churchill's picture

Go flip some new cars bought on sub-sub- prime finance as well.

What could go wrong ?

Mon, 09/10/2012 - 15:21 | 2779437 CPL
CPL's picture

Tyler you forgot to work in inflation and a weakening dollar value into the profit numbers.


That last chart should offer a 0 and negative numbers.  Makes for a way cleaner picture on how awful things are becoming because of central banks printing and the regional communists in the various countries kneecapping thier currencies.


In effect, any business doing business with USD (or any FIAT) is losing money hand over fist daily.   Airline industry the quintesential canary in the coal mine is where I'm drawing my influences from.  They are in bad shape.

Mon, 09/10/2012 - 15:37 | 2779491 pamriallc
pamriallc's picture

Below 50 but printing will take the index to 500.

Mon, 09/10/2012 - 15:45 | 2779512 CPL
CPL's picture

good article..clean, funny and to the heart of the problem...I like that

Mon, 09/10/2012 - 15:57 | 2779570 RockyRacoon
RockyRacoon's picture

I enjoyed it as well.  The sort of article one can send to the normally clueless acquaintances.  Nah... never mind.

Mon, 09/10/2012 - 15:46 | 2779502 dead hobo
dead hobo's picture


I don't know if anyone has noticed this but the recent rally is the poster boy example of inflationary expectations.

While the Fed prefers to think of inflationary expectations in a Phillips curve and consumer prices context, the asset price run-up in recent weeks is absolutely no less than a reflection of inflationary expectations, as applied to financial assets and commodities.

So, my challenge to all is please, ask yourself and ask others if you are in a position to write what others read; Did we just witness a textbook example of inflationary expectations being brought to life and applied to financial assets since the bandwagon rumors of Fed intervention in MBS started a few weeks ago?

Please ... ask loudly so the Fed must address how inflationary expectations as applied to wages differs from inflationary expectations that apply to financial assets and commodities.

Mon, 09/10/2012 - 15:54 | 2779553 CPL
CPL's picture

It is beyond that now, it is now how quickly the parabolic curve rises.  There is zero way to reset the system now.  We had a chance 5 years ago under Bush, but that dickhead set the chain of events in motion and set the priorities (aka bailout useless companies and governments).


What should have happened...everyone gets poor...the businesses go bust, close the banks, let the entire system reset.  Not the cleanest or well developed way, but as a spieces we've burked up enough times historically to understand that scraping bad ideas goes a long way.


Now all we have is inflation and the possiblity of a nuke fight breaking out over oil with China and a rapidly disappearing resource that 99% of the planet uses.  It sucks ass, but my recommendation is take a vacation and enjoy the time you have while the currency you carry has some meaning.  The one single topic of conversation with anyone over the age of 60 I've had on the East Coast is how to pay the bills....even the "rich" ones are finding they aren't nearly as rich as they once were.

Mon, 09/10/2012 - 16:05 | 2779616 Colonel Klink
Colonel Klink's picture

Bullish!  Man that's sooo close to bullshit.  Almost misspelled it.

Mon, 09/10/2012 - 16:16 | 2779672 larz
larz's picture

Caution! Lets make money and not worry so much about being right - now go get em team

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